Nardelli puts fat cat pay back on agenda

The $210m pay-off for Home Depot’s boss is likely to lead to new rules, writes Dominic Rushe from New York

January 7, 2007

In a ballroom in Wilmington, Delaware, a sparse crowd of shareholders and union representatives turned out last May for the annual meeting of Home Depot, the world’s largest DIY retailer.

Those expecting the usual question-and-answer session were to be disappointed. The crowd was informed that the executive team was too busy to attend. Bob Nardelli, chief executive, would be taking all questions. A digital clock measured the 30 minutes he had granted the audience. Each question was restricted to one minute, the microphone cutting off at that point. Already seen as imperious and out of touch, this was the beginning of the end for Nardelli.

Last week after a long and bitter battle with shareholders and critics, the man once seen as a potential successor to GE’s legendary Jack Welch was forced out. In his six years at the top, Nardelli may have failed to make a lasting impression on the $81 billion (£42 billion) DIY business that attracts 22m customers a week. But his $210m pay-off has put a firecracker under the already hot topic of executive pay.

In a note to investors, David Strasser, a Bank of America analyst, wrote that staff had developed "an intense dislike of Nardelli".

But it is in Washington that his fall may have the most lasting impact. Executive pay is already under scrutiny and, after Nardelli’s exit, Democrats announced that they would be holding hearings on the subject.

Even pay consultants were shocked by Nardelli’s pay-off. Frank Glassner, chief executive officer of Compensation Design Group in New York, described the $210m severance as "absolutely egregious".

Home Depot is still a huge and powerful business and has increased its sales considerably under Nardelli’s stewardship. But his performance and his pay packets have diverged in recent years and his compen- sation has always been out of proportion to his peers.

Today Home Depot is worth about $9 billion less than it was when Nardelli arrived. Lowe’s, a smaller rival, has increased in value by $44 billion. Last year Lowe’s chief executive Robert Niblock’s total compensation was $3.8m. He had shares and options worth $12.8m.

With his pay-off, Nardelli received $247m during his tenure at Home Depot. In the fiscal year ending January 31, 2006, the board awarded him a $7m bonus and $14.7m worth of restricted shares. His exit package included $20m in cash.

One of the people responsible for awarding the package was Kenneth Langone, who runs the board’s governance committee. He was head of the New York Stock Exchange’s compensation committee when it awarded former boss Dick Grasso the $140m pay package that led to his ousting in 2003.

"Ken Langone never met an executive compensation package he didn’t like," said Glassner.

Shareholders are already threatening legal action.

The sudden fall of one of America’s best-known chief executives illustrates how perilous times have become for corporate pay packets. Shareholders have not blinked at the outsized bonuses Wall Street bosses have awarded themselves. But their pay deals are directly linked to stellar returns to shareholders.

But it seems the days of fat-cat pay for poor performance are gone. The Securities and Exchange Commission has called on companies to expand the information they provide to investors about the salary, incentives and perks given to senior executives. Glassner said the Compensation, Discussion and Analysis disclosures will make it hard for boards to justify Nardelli-sized pay deals for poor performance.

Barney Frank, Democrat chairman of the House Financial Services Committee, said yesterday he would hold hearings on executive pay. "The actions of Home Depot’s board of directors to simultaneously dismiss Robert Nardelli and provide him with $210m in severance is further confirmation of the need to deal with the pattern of CEO pay that appears to be out of control," he said.

Now he wants to use the fallen DIY boss’s pay-off to fix the problem. You can be sure this is not what Nardelli or his board had in mind when they awarded it.